How integrated are captives in today’s market?
Based on the existence of more than 7,000 operating captive insurance companies and more than three decades of mainstream market and regulatory acceptance, the captive insurance model can be considered, by nearly all measures, a well-accepted risk-management option in today’s market.
This was certainly not always the case. State and federal insurance regulators and tax authorities have scrutinized, analyzed and challenged from many angles the use of captives. In the end, the captive market is better for it. What stands in the market today are captive options that have been clarified and refined. The long-term value of a well-structured captive is now much more clear and predictable.
To say that the captive insurance model is well accepted does not mean that there are no longer any challenges from a regulatory perspective. It is true that there are standard captive structures that have become well accepted. But the market continues to evolve and new captive structures and innovative uses for captives are being designed all the time. As you would expect, any new business methodology that either impacts the Internal Revenue Service’s standard of living or runs afoul of an insurance regulator’s standards of acceptable practice will be subject to some degree of scrutiny. Nevertheless, the fact that the debate has moved from “should a captive be permitted to exist at all” to whether certain customized versions should be permitted is another strong indicator of market acceptance.
There is no question that one of the most important drivers for market acceptance and long-term market integration of captives was the recognition in the mid 1990s that in proper circumstances, premiums paid to captives would be deductible. The IRS affirmed the deductibility of premiums paid to a captive by the captive owner’s separate subsidiary companies. Premiums paid to a captive directly by the parent company exclusively were not deductible.
Once the premium deductibility issue was settled to the point where tax professionals could be confident in premium deductibility, captives started forming in record numbers.
In the 15 years between 1991 and 2006, the total number of captives in the world market rose from 3,000 to 6,000 – a doubling of the number globally. During the same period, Vermont, the leading captive jurisdiction in the U.S., saw a nearly 340% increase in captives formed from 234 to 791.
One reason for the significant jump in numbers of captives is that smaller companies have discovered the captive benefits. Initially, the captive market was shaped by the largest corporations with complex risk-financing issues to manage. Once captives became commonplace, opportunities for their use became more obvious and available to smaller companies looking for flexibility and greater control. For example, captives are frequently used today by a variety of small-business professionals ranging from contractors to physicians. These professionals have discovered the distinct advantages of using a captive as a key component of their overall risk-financing strategy.
New applications for captives are being developed all the time and are worth evaluating for your particular risk-management situation. Consulting a professional risk management advisor with captive expertise will provide insight into options for your specific needs.